FINANCIAL SERVICES TRIBUNAL
2012 ONFST 18
Decision No. M0484-2011-1
IN THE MATTER OF the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29 (the “Act”), in particular sections 7-10, 14, 19, 21, 38 and 39, and the following Regulations under the Act;
AND IN THE MATTER OF Larissa Pritsker (“Pritsker”);
AND IN THE MATTER OF a request for hearing pursuant to subsections 21(3) and or 39(5) of the Act.
BETWEEN:
LARISSA PRITSKER
Applicant
- and –
SUPERINTENDENT OF FINANCIAL SERVICES
Respondent
BEFORE:
Anne Corbett Vice Chair of the Tribunal and Chair of the Panel
Patrick Longhurst Member of the Tribunal and Member of the Panel
David Short Member of the Tribunal and Member of the Panel
APPEARANCES:
Larissa Pritsker
Stephen Scharbach, representing the Superintendent of Financial Services
HEARD:
April 23, 2012
REASONS FOR DECISION
This is a decision upon a hearing held pursuant to s. 21(3) of the Mortgage Brokerages, Lenders and Administrators Act, 2006 S.O. 2006 (“the Act”) at the request of Larissa Pritsker (the "Applicant").
On August 15, 2011, the Superintendent of Financial Services (the "Superintendent") issued a Notice of Proposal to impose an administrative monetary penalty of $3,000 against the Applicant for failing to have errors and omission insurance (“E&O insurance”) on two occasions as required by the Act.
A. Background and Relevant Facts
Both the Applicant and the Superintendent have agreed that:
The Applicant held a licence as a mortgage brokerage under the Act from July 1, 2008 to October 11, 2011.
The brokerage initially applied for a brokerage licence under the Act in an application dated March 28, 2008. In that application, Ms. Larissa Pritsker, on behalf of the brokerage, ticked a box indicating that the brokerage will have the required errors and omissions insurance in place by July 1, 2008.
In the fall of 2008, the Superintendent conducted an audit of mortgage brokerages and determined that the Applicant did not have E&O coverage as of the date of the audit, October 15, 2008.
By e-mail on November 26, 2008 and by registered letter dated December 12, 2008, the Superintendent notified the brokerage that the audit had determined that it did not have E&O insurance and asked it to provide proof of coverage and indicate whether it had conducted any mortgage business.
The brokerage responded by e-mail on December 30, 2008. The brokerage stated that it conducted no business and indicated that it was in the process of obtaining insurance.
On January 20, 2009, the brokerage provided to the Superintendent proof that it obtained E&O coverage for the period from January 20, 2009 to April 1, 2009.
The brokerage did not have E&O coverage in place from July 1, 2008, to January 19, 2009, a period of just over 5.5 months, although it was licensed as a mortgage brokerage during that time. (The Tribunal notes that this period was in fact just over 6.5 months.)
In the fall of 2010, the Superintendent conducted a second audit to determine compliance by the mortgage brokerage.
That audit determined that the brokerage did again not have E&O coverage as the date of the audit – October 15, 2010.
On December 14, 2010, the Superintendent notified the brokerage by e-mail that the audit had determined that it did not have E&O insurance and asked it to provide proof of coverage and indicate whether it had conducted any mortgage business.
The brokerage responded by e-mail dated December 21, 2010. It stated that it did not conduct any mortgage brokerage business in 2010. It also provided proof that it obtained coverage effective December 17, 2010.
It was later determined that the brokerage had no coverage from April 2, 2010 to December 16, 2010, a period of over 8 months.
The Superintendent issued a notice of proposal to impose administrative monetary penalties on August 15, 2011.
The brokerage applied to surrender its brokerage licence and that request to surrender was granted. The brokerage's licence was terminated effective October 11, 2011.
Additional evidence was put before the Tribunal through the affidavit of Mr. Anotol Monid, the Director of Market Regulation in the Licensing and Market Conduct Division of FSCO.
In particular, Mr. Monid, in his affidavit states that:
The system of regulation created by the Act and the regulations made under it is designed to ensure that the public receives ethical, competent, and knowledgeable services from those licenced under the Act to carry on the business of dealing, trading or administering mortgages in Ontario.
The Act's regime depends on voluntary compliance.
Under the Act and Regulations, once licenced, brokerages must comply with ongoing requirements including minimum standards of practice, for example, requirements relating to the provision of accurate licencing information to the public, advertising, disclosure of the details of particular transactions, maintaining records, and managing trust funds and maintenance of errors and omissions coverage.
These requirements are designed to protect the public - and of those requirements, the one that most clearly and directly protects the public is the requirement that brokerages maintain errors and omissions coverage.
The requirement that all licenced brokerages have E&O coverage was not contained in the previous legislation governing mortgage brokers (Mortgage Brokers Act).
The failure of a brokerage to maintain E&O clearly puts the public at risk of harm. Without E&O there can be no assurance that funds will be potentially available to compensate for borrowers, lenders or investor losses.
The requirement to have E&O is a requirement imposed on licenced brokerages whether or not the brokerage actually carries on business, or brokers a completed mortgage transaction.
Because the contraventions revealed during the 2008 audit were processed during the initial stage of administering the new E&O requirement, the Superintendent generally proposed a minimal penalty of $1,000 for simple lack of E&O coverage.
In the case of brokerages found to be in contravention of the E&O requirement for a second time (but were now in compliance), the Superintendent generally proposed a penalty of $3,000.
Brokerages that have been found to be non-compliant with the E&O requirement for a second time suggest an inability or unwillingness to be governed under the regulatory system and warrant a higher AMP to achieve both specific and general compliance.
The Applicant gave evidence on her own behalf. The Applicant came to Canada 20 years ago and has worked consistently as a real estate broker. She obtained the brokerage licence in case she needed to do business under that licence in the future. The Applicant acknowledged that she understood that the requirement to have insurance was to protect the public but she admitted that she was not in compliance with the requirement to have E&O insurance on two occasions. The Applicant asked the Tribunal to consider that she has not carried out any mortgage business since obtaining her licence in 2008 and she readily gave up her licence.
B. Statutory Framework
The Superintendent is authorized to issue mortgage brokerage licences under the terms of the Act which came into effect July 1, 2008. Mortgage brokerages are required by the Act and the regulations to have errors and omissions insurance in a form approved by the Superintendent and with a minimum level of coverage.
The Mortgage Brokerages: Standards of Practice Regulation, O. Reg. 188/08 prescribes standards of practice for every mortgage brokerage licence that is issued under the Act, including the following:
42.(1) A brokerage shall maintain errors and omissions insurance in a form approved by the Superintendent with extended coverage for loss resulting from fraudulent acts or shall have some other form of assurance in a form approved by the Superintendent.
(2) The insurance or other assurance must be sufficient to pay a minimum of $500,000 in respect of any one occurrence involving the brokerage or any broker or agent authorized to deal or trade in mortgages on its behalf and $1 million in respect of all occurrences during a 365-day period involving the brokerage or any such broker or agent.
The Act provides for the imposition of administrative penalties as follows:
38.(1) An administrative penalty may be imposed under section 39 or 40 for either of the following purposes:
To promote compliance with the requirements established under this Act.
To prevent a person or entity from deriving, directly or indirectly, any economic benefit as a result of contravening or failing to comply with a requirement established under this Act.
(2) An administrative penalty may be imposed alone or in conjunction with any other regulatory measure provided by this Act, including a compliance order or the amendment, suspension or revocation of a licence.
39.(1) If the Superintendent is satisfied that a person is contravening or not complying with or has contravened or not complied with a requirement established under this Act, other than a requirement for which a penalty is provided under section 40 or a requirement prescribed under clause 55(5) (a), the Superintendent may, by order, impose an administrative penalty on the person or entity in accordance with this section and the regulations.
Section 39 goes on to provide that the Superintendent shall give a notice of proposal to impose an administrative penalty, which may be combined with a notice of proposal authorized by any other section of the Act, and that the person on which the penalty would be imposed may request a hearing on the proposal before this Tribunal (subsections (2) and (3)), as has happened in this case.
The Administrative Penalties Regulation, O. Reg. 192/08, provides criteria to govern the amount of an administrative penalty as follows:
The Superintendent shall consider only the following criteria when determining the amount of an administrative penalty to be imposed under section 39 of the Act for a purpose set out in section 38 of the Act:
The degree to which the contravention or failure was intentional, reckless or negligent.
The extent of the harm or potential harm to others resulting from the contravention or failure.
The extent to which the person or entity tried to mitigate any loss or to take any other remedial action.
The extent to which the person or entity derived or reasonably might have expected to derive, directly or indirectly, any economic benefit from the contravention or failure.
Any other contraventions or failures to comply with a requirement established under the Act or with any other financial services legislation of Ontario or of any other jurisdiction during the preceding five years by the person or entity.
Section 41 of the Act provides that the maximum administrative penalty that may be imposed on a person or entity that is a mortgage brokerage for a failure to comply with a requirement of the Act is $25,000 and the maximum penalty that may be imposed on an individual who is a mortgage broker is $10,000.
Upon holding a hearing on a notice of proposal under the provisions of the Act relating to a proposed imposition of an administrative penalty or the suspension or revocation of a licence, the Tribunal may direct the Superintendent to carry out the proposal, with or without changes, or substitute its opinion for that of the Superintendent (subsections 21(4) and 39(6)).
C. Issues
The issue to be determined in this case is:
Should an administrative monetary penalty be imposed for a failure to have E&O insurance on two occasions and, if so, should the amount of that penalty be $3,000.00 as proposed by the Superintendent or some other amount?
D. Decision
Both the Applicant and the Superintendent agree that the Applicant was in contravention of the requirement to maintain E&O insurance on two occasions, firstly, for a period of just over 6.5 months in 2008-2009 and the second time for a period of over 8 months in 2010.
The Superintendent is seeking the imposition of an administrative penalty in the amount of $3,000.
The imposition of an administrative monetary penalty serves the two required purposes of promoting compliance with the requirements established under the Act, and the prevention of a person or entity from deriving an economic benefit as a result of contravening or failing to comply with the Act.
In the Millennium Mortgage Corporation decision (FST Decision No. M0365-2009-1) the panel stated:
“An administrative penalty may be imposed pursuant to the Act for either of two purposes, namely to promote compliance with a requirement established under the Act and to prevent a person form deriving an economic benefit as a result of failing to comply with a requirement established under the Act. In our view, the promotion-of-compliance purpose relates not just to compliance by the person to whom the order is directed but to compliance by others in the regulated mortgage brokering industry. In other words, there can be a general deterrent element to a penalty; a penalty can be imposed to send a message, as it were, to others who are in a similar position to the person against whom the order is directed or to other industry participants generally.”
The Tribunal has concluded that the imposition of a monetary penalty in this case is appropriate and will serve as a deterrent to others. The maximum penalty under the Act is $25,000. The Superintendent is proposing a penalty of $3,000.
In determining the appropriate amount of the penalty the Tribunal must take into account the five criteria set out in section 3 of the Administrative Penalties Regulation:
The first criterion is the degree to which the failure to comply with a requirement of the Act was intentional, reckless or negligent. The Applicant has acknowledged that she was negligent in failing to maintain E&O insurance.
The second criterion is the extent of the harm or potential harm to others resulting from the Applicant’s failure to obtain E&O insurance. While in our view there was no real harm, as there is no evidence the Applicant conducted any mortgage brokerage business during the period she was without insurance, there was a potential for harm to the public as the Applicant could have commenced business during the period.
The third criterion is the extent to which the person tried to mitigate any loss or take any other remedial action. While the Applicant did place insurance after reviewing the notice as a result of the first audit, the Applicant took no steps to maintain that insurance.
The fourth criterion is the extent to which the person derived or reasonably might have expected to derive any economic benefit from the failure to comply with a requirement of the Act. The Applicant received an economic benefit, in the amount of the insurance premium for the lapsed 8 months that she was without coverage but the holder of a licence under the Act during the second infraction.
The fifth criterion is any other contraventions or failures to comply with a requirement established under the Act or with any other financial services legislation of Ontario or of any other jurisdiction during the preceding five years by the person or entity. Apart from the failure to have insurance in 2008, there was no suggestion that there was any other contravention or failure in this case.
Taking account of the five criteria, we are of the opinion that the administrative monetary penalty stated in the Superintendent’s notice of proposal in the amount of $3,000 is appropriate.
E. Order
We hereby direct the Superintendent, by order, to carry out his proposal to impose an administrative monetary penalty upon the Applicant in the amount of $3,000.
Dated at Toronto, Ontario, this 4th day of July, 2012
“Anne Corbett”
Anne Corbett
Vice Chair of the Tribunal and Chair of the Panel
“Patrick Longhurst”
Patrick Longhurst
Member of the Tribunal and Member of the Panel
“David Short”
David Short
Member of the Tribunal and Member of the Panel